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Sustainable Development (SD): An Investment or a Cost?

Dr. Blair W. FeltmatePh: 416-592-1708, blair.feltmate@opg.com

Canadian Centre for Ethics in Public AffairsFebruary 26, 2008

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Objectives

• Define sustainable development (SD)

• Identify which industry sectors are embracing SD

• Profile the business case for SD

• Profile emerging SD business drivers

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Sustainable Development…

“meeting the needs of the present withoutcompromising the ability of future generations

to meet their own needs”

World Commission on Environment and Development, 1987

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Environment- increase recycling efforts- produce less waste- support energy efficiency- reduce spills- lower SO2, NOx, greenhouse gas emissions- support biodiversity- manage nuclear waste- ISO 14001

Economy- support local procurement- support local hiring- support training and scholarship programs

Society- support door-to-door community outreach, plant tours, etc.- support work/family life balance programs (e.g. flexible work hours)- recognize value of a diverse workforce

SustainableDevelopment

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Coca Cola

Alcan Rio Tinto Shell CanadaSuncor

Ricoh Baxter Rezidor L’Oreal

Canfor

Royal Bank

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Causal Factors/Direct “Bottom Line”

Impact

• access to markets/new build• employee attraction/productivity• discount on borrowed capital/

lower insurance premiums• address customer demands• facilitate partnerships• increase efficiency• inclusion in “SD” Funds

Correlational Factors/“Quality of

Management”

• corporate governance• product innovation• financing options• manufacturing processes/

production line efficiency• skills upgrade• continuous improvement

SHAREHOLDER VALUE

SHAREHOLDER VALUE

Sustainable Development, Quality of Management

and Shareholder Value

Level 1Metric

Level 2 Metric Ranking

0 1 2 3 4 5

General SD PolicyGoals and TargetsContact PersonsStakeholders Identifiedetc., etc. Avg. g = 3.5 ng = 4

Environment Waste ProductionEnergy ConsumptionEnergy ConservationWater ConsumptionLand Remediationetc., etc. Avg.e = 3.8 ne = 5

Economy Share Best PracticesLocal ProcurementLocal HiringContribution to ResearchWage Based Economyetc., etc. Avg. ec = 3.4 nec =

5Society Town Hall Meetings

Odour ControlCommunity SupportTransferable SkillsDevelopmentRecreational SupportAesthetic ValuesHeritage Sitesetc., etc. Avg. s = 3.7 ns = 7

SDI = weighted average score

SDI > 70% = SD Company = Superior Quality of Management

ABC Co. = 72.3%

EvaluatingPerformance site visits questionnaires interviews reviews of SD and

Environmental Reports

40 - 160Performance

Measures

Method• Quantitative• Comprehensive• Proprietary

Analysis• Industry Specific• Rigorous

Measures• Practical• Meaningful• Cost Effective

Sustainable Development Index -- SDI

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33 countries, 318 companies, 57 sectors $5 billion in investment vehicles

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The sdEffect:Translates environmental, social and economic performance (eg. metals recycling, community outreach programs) for 6 mining companies into impact on share price, using:- Ratio Analysis- Discounted Cash Flow- Rules of Thumb Valuations- Economic Value Add (EVA)- Options Pricing

"The report provides the first steps in using financial language to measure the impact of sustainable development on the bottom line. This report… lays the foundation in linking sustainable development to company performance and provides another tool for financial professionals to use in their on-going analysis.“ Donald Reed, President and CEO

Franklin Templeton Investments Corp.

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Emerging SD Driversa. UK Turnbull Report -- as of 2000, required companies listed on

London Stock Exchange to disclose all risk -- financial, environmental, social, ethical.

Companies listed on the Toronto Stock Exchange (TSE) will be required to produce a “sustainable development” style report in the not-too-distant future (Barbara Stymiest, former President, TSE)

b. Pension Legislation Changes -- as of 2000, UK required pension plans to disclose the degree to which they factor the “environmental, social and ethical” performance of companies into their investment decision-making -- since then… France, Germany, Belgium, Sweden, Australia adopted similar legislation.

c. Canadian SRI Assets Under Management -- 2004 = $65 billion, 2006 = $504 billion : increase due primarily to SRI mandates by several major pension funds.

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d. Canada Pension Plan -- created the position of “Manager, Responsible Investing” -- CPP manages > $100 billion.

e. MBA Programs -- most MBA programs now feature “Corporate SD” courses. Ivey School of Business, University of Western Ontario, all students are required to take course in corporate SD.

f. Global Reporting Initiative (GRI) and ISO 26000 Guidelines -- International standards have been developed to guide corporate SD reporting. Standards are now in place for industry sectors. [2,000 - 2,500 companies produce SD Reports]

g. Cost of Carbon -- CO2 at $15 - 30 per tonne

h. Al Gore -- An Inconvenient Truth : James Lovelock -- Gaia

i. World Population Growth -- another 2.25 billion people by 2025 - 2030

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• An “environmental” focus is out-of-date -- sustainable development is the new business imperative, regardless of industry sector.

• SD is a long-term trend, not a fad.

• SD, properly applied, is a revenue generator -- not a “cost” -- that correlates with quality of management.

Conclusions